How getting married affects your taxes — for better or for worse

When you get married, your tax situation changes. Here are the most important things to know.

Married at year-end means married for the whole year

Your marital status as of Dec. 31 determines your tax filing options for the entire year. If you’re married at year-end, you only have two choices: (1) filing jointly with your new spouse or (2) using married filing separate status for a separate return based on your income and your deductions and credits.

There are two reasons why most married couples file jointly.

It’s simpler. You only have to file one Form 1040 and you don’t have to worry about figuring out which income, deduction, and tax credit items belong to which spouse. Other things being equal, simple is good.

It’s often cheaper, too. That’s because using married filing separate status makes you ineligible for some potentially valuable tax breaks such as the child-care credit and the two higher-education credits. Therefore, filing two separate returns may result in a bigger combined tax bill than filing one joint return.

But if you file jointly, you’re on the hook for your spouse’s tax misdeeds

Despite the preceding advantages, filing jointly is not a no-brainer for one big reason: for any year that you file a joint return, you’re generally “jointly and severally liable” for any federal income tax underpayments, interest, and penalties caused by your new spouse’s unintentional tax errors and omissions or deliberate tax misdeeds. Joint and several liability means the IRS can come after you if collecting from your spouse proves to be difficult or impossible. They can even come after you long after you’ve divorced.

However if you can prove that you didn’t know about your spouse’s tax failings, had no reason to know, and did not personally benefit, you can try to claim an exemption from the joint-and-several-liability rule under the so-called innocent spouse provisions. Believe me, this is easier said than done.

In contrast, if you file separately, you have no liability for your spouse’s tax screw-ups or misdeeds. Period.

Bottom line: If you have doubts about your new spouse’s financial ethics in general and attitude about paying taxes in particular, I suggest filing separately until doubts are dispelled. While your tax bill might be somewhat higher than if you file jointly, that could be a small price to pay for “insurance” against the joint-and-several liability threat.

Will you pay the marriage penalty or collect the marriage bonus?

You’ve undoubtedly heard about the tax penalty on marriage. It causes some (but not all) married joint-filing couples to owe more federal income tax than if they had remained single. The reason: at higher income levels, the tax rate brackets for joint filers are not twice as wide as the rate brackets for singles.

For example, the 28% rate bracket for singles starts at $91,151 of taxable income (for 2016). For married joint-filing couples, the 28% bracket starts at $151,901. If you and your spouse each have $90,000 of taxable income in 2016, you’ll pay a marriage penalty of $843 because $28,100 of your combined taxable income falls into the 28% rate bracket. If you had stayed single, none of your income would have been taxed at more than 25%. Because the marriage penalty is usually a relatively modest amount, I think it should be viewed as more of an annoyance than a deal breaker.

On the opposite side of the coin, many married couples actually collect a tax bonus from being married. If one spouse earns most or all of the taxable income, it’s highly likely that filing jointly will reduce your tax bill (the marriage bonus). For a high-income couple, the marriage bonus can be several thousand dollars a year.

Bottom line: If you and your new spouse both earn healthy and fairly equal incomes, you’ll likely fall victim to the marriage penalty. If not, you’ll likely collect the marriage bonus.

Selling an appreciated home after getting married

Say you and your spouse both own homes. If you sell yours for a profit, up to $250,000 of the gain will be free from any federal income tax if you owned and used the home as your principal residence for at least two years during the five-year period ending on the sale date. The same is true for your spouse. So you could both sell your respective homes, and you could both potentially claim the $250,000 gain exclusion deal — for a combined federal-income-tax-free profit of up to $500,000. Nice!

Say you sell your home, and you both move into your spouse’s home (this could happen before or after you get married). After you’ve both used that home as your principal residence for at least two years, you could sell it and claim the larger $500,000 joint-filer gain exclusion. In other words, you could potentially claim a $250,000 gain exclusion on the sale of your home, and with a little patience claim a later $500,000 gain exclusion on the sale of your spouse’s home. That’s what I would call good tax planning.

For more information

This article hits what I think are the most important tax implications of getting married. Needless to say, there’s more to the story. For additional information, check out IRS Publication 504 (Divorced or Separated Individuals) at the IRS website. The name of the publication is misleading. It actually has almost as much to say about the tax implications of getting married as the tax implications of getting divorced or separated.